DAMASCUS, SYRIA -- Crushing foreign debt and a cash crisis have moved Syria's economy closer to bankruptcy, a situation that other Arab states in the region hope will loosen the country's ties to Iran.
Growing strains between Damascus and Tehran over their rival efforts to gain influence in Lebanon also have increased the opportunity to bring Syria back into the Arab camp, in the view of some of the Persian Gulf countries.
For a decade, the wealthy Arab oil states have stood ready to pour financial aid into Syria, in recognition of its role as a chief combatant against Israel as well as its lack of oil wealth. But Syria's close relationship with Iran has become an obstacle to this pledged cooperation.
Syria's association with Iran, however, is based not only on its longtime hostility toward neighboring Iraq -- with whom Iran has been at war since 1980 -- but also on close commercial ties that, through Tehran's readiness to supply oil in recent years, have put Syria an estimated $2 billion in debt to Ayatollah Ruhollah Khomeini's regime.
In a recent round of meetings with officials of Iran and Iraq, Syria has begun the difficult task of finding a diplomatic course that will appease its Arab critics while avoiding an estrangement with Tehran, and at the same time boost its standing as a regional power, according to western diplomats.
"It is the politics of Syria that always helps it survive, not its economic strategy -- we can't decide on one," commented a Syrian textile importer, summing up his country's way of doing things.
Syria is experiencing its worst cash crisis in 16 years. Foreign currency reserves are down to $20 million to $40 million -- less than one-tenth what they were eight years ago. Arab assistance has fallen off sharply and debts owed to East Bloc and western creditors, including the World Bank, have ballooned.
Last summer, the World Bank stopped disbursing new funds to Syria when it first fell behind in its repayments. In February, when Syria fell six months in arrears, the World Bank put it in nonaccrual status -- a move that includes a public declaration that a country is in arrears and a ban on further disbursements until its account is current.
Syria now is more than $60 million in arrears to the World Bank and has more than $200 million in total debts with it, according to an economic specialist here. Earlier this year, after a visit by a seven-man World Bank team, Syria reportedly made a token $5 million payment -- not enough to affect its status.
Syria had been promised substantial aid from Saudi Arabia, Kuwait and other Persian Gulf states if it reconciled with the rival Baathist regime in Iraq, a move that could pave the way for an Arab summit meeting later this year and help end the Iran-Iraq war.
But among Arab oil states in the Persian Gulf region, only Saudi Arabia has been honoring commitments of financial assistance made at a summit meeting of the Arab League in Baghdad in 1978. Syria gets about $540 million a year from the Saudis under the 10-year Baghdad agreement, which expires next year. Western diplomats here said Saudi Arabia recently made a payment of $175 million, but they said Syria is still owed about $1.8 billion in payments pledged by other countries.
Drastic measures to conserve scarce resources through restrictions on imports and use of foreign currency, and a stringent anticorruption drive have hampered private initiative and failed to attract the capital of wealthy Syrians deposited abroad -- estimated at $52 billion. Heavy military spending has taken up much of the available revenue.
Syrian newspapers are filled with stories on field rodents affecting the crops. "It is almost funny," one economic specialist said, "but field mice are a problem Syria cannot afford because it doesn't have the money to buy pesticides."
The state-owned Syronix plant, which used to assemble television sets and was one of Syria's major factories, is now reduced to manufacturing dolls because there is no hard currency to import badly needed spare parts for its machinery.
The kidnaping of American writer Charles Glass last month by Iranian-linked operatives in a Syrian-controlled area of Lebanon, an act that the kidnapers said was intended to show Iranian discontent over Syria's recent flirtation with Iraq, brought into sharper focus the underlying contradictions in the Damascus-Tehran association.
"This is the most unnatural relationship in the Middle East -- the most secular state, Syria, and the most religious, Iran," said a western diplomat.
Jordan, a staunch supporter of Iraq, has sought to reconcile it with its political foe Syria, the only major Arab backer of Iran in the gulf war. A confirmation by Jordanian Prime Minister Zeid Rifai last week that Jordan's King Hussein had hosted a secret meeting between the Syrian and Iraqi leaders in the Jordanian desert in April made official, probably with the approval of Syria, rumors reported two months ago.
The disclosure was seen here as part of Syria's efforts to restrain Iran from exceeding specific limits in its activities in Lebanon and the region. A visit by Syrian Foreign Minister Farouk Charaa to Tehran last Sunday, however, appeared aimed at reassuring Iranian leaders of Syria's continued support.
It has often been said that the only thing Syria and Iran have in common is their dislike for Iraqi President Saddam Hussein. Arab concern for at least a show of cohesion -- what one observer described as "getting Assad to smile instead of glare at Saddam Hussein," no matter how superficially -- may help Syria financially.
However, it is not only enmity to Saddam Hussein that has helped cement an otherwise unlikely alliance between Syria and Iran. Syria owes Iran an estimated $2.3 billion for oil, not counting amounts given as gifts. Iran provided Syria with about 6 million tons of oil annually from 1982 to 1985.
Well-informed diplomatic sources here said a new oil agreement concluded with Iran in April secures for Syria 1 million tons of free oil and 2 million tons at 25 percent less than the OPEC price over a year.
There has been no indication whether laborious consultations with an Iranian economic delegation that came here in mid-June has led to any barter arrangements to reduce Syria's huge oil debt. Phosphates, textiles and a big part of Syria's cotton production are bartered for goods from East Bloc countries.
Syria's foreign debt to the West is estimated at $3.5 billion, and its debt to the Soviet Union, largely for military arms, is estimated at $15 billion.
Sluggish industrial production, mismanagement, over-staffed government-run plants, an ailing agricultural sector and poor marketing techniques all help to make it unlikely that Syria can stage an early economic recovery, analysts say. The country is increasingly burdened by an inflation rate that experts put at 125 percent -- although officially it is said to be only 40 percent.
One hopeful sector, however, is oil. An important discovery in 1984 by Pecten Ltd., a U.S. subsidiary of Shell Oil Co., has increased oil production by at least one-third and Syria hopes to become almost self-sufficient in a few years, according to oil industry sources.
"If Syria can get by without Iranian oil, this would be even better than an economic solution and it would drastically improve its political leverage," one oil expert said. But most observers agree that while the balance of payments for oil eventually will become positive, it will not get Syria out of its economic hole.
"Syria will probably maintain good relations with Iran," a Lebanese columnist predicted, but he added that it would probably urge Iran to lower its profile in Lebanon and halt activities there that could damage Syria's image and credibility.
Despite wide speculation that there would be a showdown between Syrian troops in Lebanon and members of the militant, Iranian-backed Hezbollah, there has been none so far. Syria's wishes to polish a tarnished international image and to distance itself from Iranian-sponsored terrorism and hostage-taking in Lebanon, coupled with a resolve to prove it is still ringmaster in the Lebanese arena, are not to be taken lightly, Syrian sources insist.
"Maybe at some point, the costs the Iranians impose on Syria in Lebanon are going to be more important in Syrian eyes than what the Iranians are doing to the Iraqis, but only then will there be a shift in alliances," said a senior western diplomat.
Syrian noises about reconciliation with Iraq are expected to keep Iran wary of Arab moves to isolate it and in line with Syria's claim to influence in Lebanon.